THE IMPACT OF INTERNET BANKING ON THE PROFITABILITY OF THE COMMERCIAL BANKS IN INDIA: BY MEHAK MEHRA

     I.         INTRODUCTION

The banking sector plays a very important role in shaping the economy of a country. A sound and healthy banking sector lay the foundation for a sound economic system. In recent times, with the opening up of the economy, tremendous advancements in technology and its consequent infusion in the banking sector have transmogrified the role of banks. It has led to the emergence of new banking products, efficient and effective delivery channels in the banking industry. Most of the brick and mortar banks are shifting from the ‘product-centric’ model to ‘customer-centric’ model as they develop new e-banking facilities.[1] Internet banking is understood as an electronic payment system that enables customers of a bank or any financial institution to conduct a financial transaction through a website.[2] Today, the banking sector provides a myriad of e-banking services like mobile banking, ATM, National Electronic Fund Transfers (NEFT), Real Time Gross Settlement (RTGS), Point of Sales (POS), etc. Thus, Internet banking has become both a medium of delivery of banking services and a strategic tool for business development.

  II.         EVOLUTION OF INTERNET BANKING

The adoption of the new economic reforms (Liberalisation, Privatization, Globalization) in 1991 marked the emergence of private banks in the country. It increased the competition in the market and forced banks to adopt innovative methods of providing services paving the way for E-banking in the country. ICICI bank is credited with the genesis of internet banking in India. Other banks like Citibank, HDFC, IndusInd bank, etc., followed with e-services in 1999. The government further supported the cause of internet banking by enacting the Information Technology Act, 2000, which provided legal recognition to online transactions and the Reserve Bank of India (hereinafter referred to as RBI) who ensured a conducive environment for the development of e-banking in the economy.

 

 III.          E-BANKING & PROFITABILITY OF COMMERCIAL BANKS

Profitability is the degree to which a business yields profit and helps to determine the growth of a business. It can be measured with the help of profitability ratios like Return on Assets (ROA) and Return on Equity (ROE). These things are further dependent on the quality of services, market share, and operational costs of an organization. For instance, the facility of depositing cash and instant withdraw from ATM, transferring money from one account to another through internet banking, paying for bills instantly at the retail stores with the help of credit and debit cards has improved the customer banking experience.

 E-banking has made it very convenient for the customers to enter transactions at any given point of time without the need to visit a bank. It has substantially affected the operational and fixed costs of running the banks due to reduced human intervention. Efficient and effective online delivery channels help generate huge revenue for the banks with minimum costs. Hence, achieving economies of scale.

Further, a convenient, safe, and hassle-free banking experience with innovative methods has helped to build a healthy customer relationship by providing maximum satisfaction to the customer. All these factors together contribute to increased market share for the banks and positively affect their profitability. Without a doubt, the introduction of E-banking has proved to be a win-win situation for both banks and their clients.

Many research studies conducted to analyze the impact of e-banking on the profitability of commercial banks show positive results. A research conducted by Rupesh Roshan Singh and Navneet Kaur analyzed the ROA and ROE of banks in India to analyze the impact of e-banking on the performance of different banks. To make the comparison data is taken from public sector banks according to the Capitalization of public sector banks and total assets based on data given in the RBI bulletin, Economic Survey, Indian banking Association, etc.[3]

Banks	ROA (2018)	ROA (2019)	ROE (2018)	ROE(2019)
SBI	-0.18	0.02	-3.37	0.39
BOB	6.02	6.52	81.82	96.12
IDBI	4.67	9.849	5.23	3.992
Canara Bank	-0.68	0.04	-14.51	1.16
BOI	5.83	7.4	20.38	16.78
Indiana Bank	7.3	6.92	38.41	40.36
UBI	5.14	4.93	21.47	13.75
Vijaya Bank	5.26	5.98	8.16	8.14

Source: https://www.ijrte.org/wp-content/uploads/papers/v8i2S11/B11370982S1119.pdf.    

ROA- The ratio of Average Net Profits to Average Assets

ROE-The ratio of Average Net Profits to Average Equity     

 

The figures show great improvement in ROA and ROE of Bank of Baroda with the adoption of e-banking. There is a positive output of Canara Bank from 2018 to 2019 in both the ratios. Further, Indiana Bank has shown improvement in output in 2019 in both ratios reaping the benefits of e-banking. Although ROE has reduced for banks like UBI, BOI, and IDBI, they have shown better results in ROA. Thus, it can be concluded that e-banking positively impacts the profitability in majority cases.

 IV.         CHALLENGES

Although many banks have shown positive results after the adoption of online banking, certain factors can be a roadblock for banks. For instance, the initial costs of setting up infrastructure for e-services has to be incurred. Thus, a bank can expect profits only in the long run. Secondly, with increased competition in the market, new technology is introduced every day, and medium-sized banks might find it difficult to invest in the latest technology owing to their limited resources. Lastly, proper internet connectivity facility at the end of the customers is a concomitant to availing the benefit of e-banking.

    V.         FUTURE ROADMAP

The banking sector has great opportunities coming its way with mobile internet users expected to increase from 420.7 million in 2019 to 448.2 million users in 2020.[4] Efforts should be made to target these customers to provide access to banking services to a large populace. Further, with artificial technology strengthening its roots in the digital world, a lot of improvisations can be done, for instance, to replace chatbots for dealing with customer grievances. The government’s resolve to provide internet connectivity in backward areas can prove to be helpful for banks that intend to expand their customer base in the market. There is perhaps no industry that has not been exposed to technology and has not reaped its benefits. Thus, the banking sector needs to invest heavily in online banking, focus on improving its quality, and look forward to expanding the financial services.

 

 

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[1]  Balwinder Singh & Pooja Malhotra, Adoption of Internet Banking: An Empirical Investigation of Indian Banking Sector, 9 JOURNAL OF INTERNET BANKING AND COMMERCE (2004).

[2] Shaik Fiaz, A Study of E-banking Channel in Indian Banking Industry- With reference to SBI and ICICI Bank, 23 COMPLEXITY INTERNATIONAL JOURNAL 413 (2019).

[3] Rupesh Roshan Singh and Navneet Kaur, Interaction between Online Banking and its Impact on Financial Performance of Banking Sector:- Evidence from Indian Public Sector Banks, 8 INTERNATIONAL JOURNAL OF RECENT TECHNOLOGY AND ENGINEERING 838 (2019).

[4] Sandhya Keelery, Number of mobile phones internet users in India from 2015 to 2018 with a forecast untile 2023, STATISTA (Aug.7, 2020, 10 AM), https://www.statista.com/statistics/558610/number-of-mobile-internet-user-in-india/.